Indian Finance Blog Finance News Blog from India

The very mention of the word ‘Tax’ triggers an unrest in a person’s mind and he starts looking for options to save it. Majority of people opt for National Savings Certificate (NSC) or Public Provident Fund (PPF) for tax saving purpose. Backed by the government, both NSC and PPF are considered as safe investment options by people at large.

The question that most people ask is whether they will have to pay tax on their earnings from NSC. The answer is Yes. But, NSC offers huge tax benefits. When a person invests in NSC, he gets a deduction under Section 80C of the Income Tax Act. The deduction is up to a limit of Rs 1,00,000 and includes a person’s investment in the Employees Provident Fund, Public Provident Fund, life insurance premium payments as well as principal repayments on his home loan.

Till the Financial Year 2004-2005, an individual could have availed of a deduction under Section 80L of the Income Tax Act up to a limit of Rs 12,000 of interest income received during the financial year. However, this deduction has been done away with from FY 2005-2006. Now, all interest income is taxable at the respective slab rate of the individual. The income of a person is taxable under the five heads of income:

Interest on NSC is taxable under the head ‘Income from other sources’. Generally, it is advisable for a person to declare accrued interest on NSC on a yearly basis.

However, there are better options than NSC to save your tax. The tax savings deposit schemes offered by the most commercial banks have a tiny edge over instruments like NSC and PPF. Most banks offer a slightly higher rate of interest on their five-year tax savings deposits as compared to the 8% rate offered by the NSC or PPF.  This helps people save more money.

The commercial banks are likely to keep their interest rates unchanged at least for the next 15 days, the period when income tax payers typically rush to invest in tax benefit schemes under Section 80C of Income-Tax Act, 1961.

At present, the State Bank of India, the Allahabad Bank, the Bank of Baroda, and the Central Bank of India are offering an 8.5% rate per annum on their five year tax benefit scheme. The Bank of India, Canara Bank and Uco Bank offer 8.25% a year, while Indian Bank and the Union Bank of India are at par with postal tax deposit schemes. On the other hand, Indian Overseas Bank (IOB), the Oriental Bank of Commerce, and the United Bank of India have special offers for tax savers. They offer a special rate of 9% a year. IOB offers this special rate for deposits of over Rs 10,000. Their normal five-year deposits, however, attract less than this rate.

Among private banks, ICICI pays 8.25%, while Axis Bank and HDFC Bank have an 8% rate in offer. The banks are taking these steps to create a market for their tax benefit schemes.